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Can subsidies rather than pollution taxes break the trade-off between economic output and environmental protection?

Renström, Thomas I. and Spataro, Luca and Marsiliani, Laura (2021) 'Can subsidies rather than pollution taxes break the trade-off between economic output and environmental protection?', Energy economics., 95 . p. 105084.


We build a general equilibrium dynamic model in which individual investors are endowed with “warm-glow” preferences a la Andreoni (1990) so that they feel partly responsible for the pollution content of their portfolio. Through investors’ portfolio choice, firms are induced to engage in costly abatement activities, given that higher pollution also implies a higher cost of capital. In this scenario, we characterize the equilibrium of the economy and investigate, through a fiscal reform analysis, the effects of such tax instruments on the equilibrium scale of the economy, per-capita consumption, pollution abatement and “pollution premium”. We show that an increase of the pollution tax, while reducing pollution, also depresses consumption, the scale of the economy and the pollution premium. On the contrary, an increase of subsidies on abatement activity increases the scale of the economy and can also decrease pollution and the pollution premium and increase per-capita consumption. All our results have relevant testable implications, which we leave for future empirical research.

Item Type:Article
Full text:(AM) Accepted Manuscript
Available under License - Creative Commons Attribution Non-commercial No Derivatives 4.0.
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Publisher statement:© 2021 This manuscript version is made available under the CC-BY-NC-ND 4.0 license
Date accepted:18 December 2020
Date deposited:06 January 2021
Date of first online publication:24 December 2020
Date first made open access:24 June 2022

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